Among the three key U.S. equity gauges, the Dow Jones underperformed the S&P 500 and the Nasdaq in 2024. The Dow Jones-based exchange-traded fund SPDR Dow Jones Industrial Average ETF DIA has added 13.1% over the past year, falling behind the S&P 500 (up 23.7%) and the Nasdaq Composite (up 30.1%) (as of Jan. 9, 2025). This year, too, the Dow Jones has been trailing (up 0.2%) the S&P 500 (up 0.6%) and the Nasdaq (up 0.9%) (as of Jan. 9, 2025).
The Dow Jones has lagged behind its peers because the Fed has been dovish in the past year, favoring the growth-stock-heavy Nasdaq. The Dow Jones has value stocks that perform well in a high-rate environment.
Moreover, the recent rally in the S&P 500 and the Nasdaq was attributed to the huge growth in “Magnificent Seven” stocks — NVIDIA, Amazon, Microsoft, Apple, Meta, Alphabet and Tesla. Barring considerable exposure to these seven magic stocks, outperformance in any index seems impossible lately.
However, even if the Dow Jones underperforms its heavyweight peers in the past year, there are some factors that can fuel the Dow rally in the coming days. Let’s delve a little deeper.
Trump 2.0 in 2025
The year 2025 will likely bring many surprises in the form of Trump 2.0 era, its impact on global trade and inflation and the resultant Fed moves. If Trump’s protectionist agenda and tariff war drive up domestic inflation, we may see hawkishness in the Fed’s ongoing dovish stance. The rate cuts in 2025 may be lower, in terms of both frequency and magnitude.
Value Stocks to Fare Better?
Fed Governor Michelle Bowman said on Thursday that she supported the recent interest rate cuts but the December reduction should have been the “final step” in the easing process. Despite the progress that has been made, there are “upside risks to inflation,” Bowman added, as quoted on CNBC.
The above-mentioned factors indicate a high-rate environment, in which value stocks thrive. And since the Dow Jones has a better value quotient than the S&P 500 and the Nasdaq, the former could fare better in the initial months of 2025.
Moderate Valuation of the Dow Jones
At the current level, the Dow Jones has a P/E of 26.80X, whereas the S&P 500 has a P/E of 24.68X and the Nasdaq-100 has a P/E of 32.14X. Moderate valuation has provided the Dow index the scope to fare better in the coming days, if other factors allow. Against this backdrop, investors can bet on iShares Dow Jones U.S. ETF IYY and DIA.
Wall of Worry for the Dow Jones
The future of the largest Dow Jones component — UNH — is uncertain in the Trump era. Health insurance companies’ shares have been under pressure lately as Trump said, “we're going to knock out the middleman.”
The Dow Jones’ largest exposure is in financial stocks. If the geopolitical risks rise in the Trump 2.0 era due to the tariff war, we may see a subdued increase in long-term U.S. treasury bond yields, resulting in the flattening of the yield curve. Financials underperform in such a scenario.
The Dow’s 30 components include just four of the Magnificent Seven tech stocks: Amazon AMZN, Microsoft MSFT, Apple AAPL and NVIDIA NVDA. The rising stars of the group — Tesla TSLA and Alphabet GOOGL — are absent in the Dow Jones, at the current level.
Bottom Line
So, overall, the Dow Jones’ performance should be moderate-to-upbeat in 2025, if not great. Investors can keep a close tab on the DIA ETF. The current period of high interest rates is proving more favorable for the Dow Jones than for the S&P 500 and the Nasdaq.
Holding 30 blue-chip stocks, the fund DIA is widely spread across components, with each having less than an 8.2% share. Financials (23.8%), information technology (20.8%), consumer discretionary (14.3%), healthcare (14.1%) and industrials (12.9%) are the top five sectors.
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SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
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iShares Dow Jones U.S. ETF (IYY): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
